West Coast rides the risk curve: venture capital firms in the West remain more willing to take a gamble on unproven companies or technologies, experts say. In Silicon Valley, "it's boring not to take a big swing," says one.

Go west, young (or middle-aged) entrepreneur. That's where venture capital (VC) firms are least troubled by risk and more willing to bankroll early-stage firms with promising but unproven technologies, according to a number of venture executives. In contrast, VC firms in the East are more likely to pony up only for more established operations, including executive teams they have funded before.

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While these may be generalizations, they are backed by plenty of evidence. Financial executives seeking funding should consider them as broad guidelines, based on interviews with a number of people in the VC industry and others working with them.

In the late 1990s, of course, the Silicon Valley area outside San Francisco loomed like a modern-day El Dorado for anyone with an idea for the Internet; fortunes were forged virtually in a days' trading, building an unsustainable bubble. Yet there's still a widespread belief that untested ideas can find more fertile soil there than they would find in New York or Boston.

"There is definitely a character to the West Coast that is based on dreamers. Entrepreneurs here can be more risk-seeking, and the venture capital community is more tolerant of taking different risks," says Nate Redmond, a partner with Rustic Canyon Partners in Santa Monica, Calif.

Rustic Canyon, with $900 million in portfolio investments, is currently disbursing investments through its third fund since its founding in 1999 and generally has 40 to 50 portfolio companies, says Redmond. Its key investment themes include Internet/media convergence, clean technology, technology-enabled services, information services and wireless and wireline broadband.

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"One key difference between the East and the West is driven by the character of the entrepreneurs," Redmond says. "A lot of the old guard firms in Boston still reflect the culture of the original founders." Unlike Silicon Valley, which mushroomed in the 1990s, some firms in the Northeast are more than 25 years old.

"A Boston firm will look at 'early stage' differently," he adds. "Often, those companies are further along than others. Today, the market is back to where strong entrepreneurs in the Bay Area can raise $5 million to $7 million on an idea; that rarely happens in Boston."

"My take is that East Coasters are more risk-averse," says Eric Shealy, a partner with Innovation Advisors, a boutique investment banking firm in Waltham, Mass., that regularly works with venture capitalists in investments in IT and software firms. "Why? That's hard to answer, but one of the fundamental reasons is that VC was started in the East, largely by HBS (Harvard Business School)-type people. It's always had a risk-averse flavor, even in the first wave."

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Financial Engineering Focus

Shealy, who has also worked for Summit Partners, a premier Boston-based VC and private equity (PE) firm, contends that as many as 80 percent of the Boston-area VC funds are staffed with HBS grads, and "they tend to think the same way. The attitude is dominated by financial engineering, with a lot of weight given to downside protections; they tend to structure a deal for downside mitigation."

"The biggest contributor to the differences is how the VC firm grew up," echoes Kevin Kemmerer, senior vice president of the Technology Group at Safeguard Scientific in Wayne, Pa., a New York Stock Exchange-listed firm that identifies and partners with entrepreneurial companies in the software applications and technology services market.

"On the West Coast, they grew out of work by operating guys in industries like Fairchild [Semiconductor], and they were focused on the 100x returns you might get from a Google. Most of the people on the East Coast came out of investment banking world, and were more interested in engineering a return."

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On the West Coast, Shealy says, "You have some of the same types, and they're very smart people. It's more of an attitudinal than a skill difference, and it's driven by Silicon Valley. The idea is that if you get in there, and if you want to make a play, make it. There is more entrepreneurial spirit, more creativity; now, some of the people on the East Coast are trying to emulate this."

Tolerance for failure is "a badge of honor in Silicon Valley," argues Kemmerer, who has been a venture capitalist on both coasts. "There is far less acceptance of that in the East. In Silicon Valley, it's part of the social fabric--it's boring not to take a big swing."

Says Shealy: "The West Coast [VC activity] is more about real risk capital and building big companies, and not so much in financial engineering." The practical effect is that in the East, unproven CEOs or teams are most often left to raise angel capital or bootstrap until sufficient risk has been removed from the business. West Coast entrepreneurs tend to fare better in luring earlier-stage investors.

Private Equity Is Definitely Different

Private equity firms tend to be investors in or acquirers of mature companies. But PE is different than venture capital, and arguably less risky. "You do find more PE on the East Coast," Shealy says. "There is a comfort with cash-flow-driven and asset-driven businesses, versus technology-driven businesses on the West Coast."

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Everyone pulled back from venture capital during the fallow years of 2001-2, but the differences between the coasts remain, several of those interviewed say. "There is more happening per square mile in technology [in the West]," Shealy says. "The more innovative stuff on the Web isn't really happening on the East Coast. The biggest focus area in the East has been life sciences." Smaller Eastern markets like Raleigh-Durham or Atlanta "are not that impactful nationally," he adds.

Safeguard Scientific's Kemmerer adds that "post-bubble, most early-stage investing was done by firms that had backed the entrepreneur before and had a personal track record. Now, in the last three years, we've seen a huge shift toward alternative energy and Internet plays"--particularly in Silicon Valley; that has created "frenzies around markets." That scale just doesn't exist in the East, he says, though there are pockets of activity in Boston and Washington, D.C.

"Southern California has this class of very creative entrepreneurs, and it also has a lot of technical talent," Redmond says. "What has been lacking here is managerial expertise. Also, there are not nearly as many venture firms here as in the Bay Area; there are Boston-area firms that are now exploring here." Considerable VC activity in Southern California is tied to content distribution and media convergence, he adds.

Fewer new firms are entering and exiting in Southern California, Redmond says, but in terms of actual venture dollars invested, he maintains, the region is as big as the Boston area. A number of Boston firms have opened offices on the West Coast, and some that shuttered offices during the dot-com meltdown have reopened them in the past three or four years, he adds.

John Huntz, executive director of Arcapita Ventures, a $200 million fund launched in Atlanta in October 2005, points to areas such as communications software (noting that Scientific Atlanta grew from a venture-funded startup), Internet security, supply chain execution and logistics as hot sectors locally. "Logistics is a strong area," he says. "UPS is here. Georgia Tech has a school in logistics."

Asked for some perspective on how the local venture community has changed, Huntz--who founded the Atlanta Venture Forum--says it has "stayed the course" while the technology community there has grown. "From a VC funding perspective, there are still very few firms in Atlanta," he says. "It's easier to hold yourself out from crowd than get lost in the noise in New York or Palo Alto."

Arcapita itself is most comfortable with "growth-stage" investments in healthcare, information technology and industrial technology companies that have gone through early funding rounds, Huntz says. Indeed, the firm looks for companies that have posted at least $2 million in revenues over the prior 12 months and have "a proven business model."

"We look to where we can put $5 million to $10 million to grow the business," Huntz says. Currently, Arcapita has four portfolio companies, two in Atlanta, one in California and another in Dallas.

The split between East and West even extends to the same firm, at least informally. If a company has divisions in the East and West, "they will share information, but they are in distinct groups that operate in pretty distinct circles," says Kemmerer at Safeguard Scientific. As a result, he says, you're not likely to see people from both offices represented in a Monday morning strategy meeting.

Still, the biggest difference comes down to risk, and a firm's acceptance of it. Shealy trots out a baseball analogy: "If you whiff big in California, that doesn't preclude you from getting another swing. On the East Coast, guys don't like to whiff."

RELATED ARTICLE: TAKE AWAYS

* Venture capitalists' risk appetite on the West Coast, and particularly in Silicon Valley, remains higher than it is in the East, people in the industry believe. Tolerance for failure is also higher in the West.

* It's commonly noted that venture started in the East; it had its roots in investment banking. In the West, by contrast, firms tended to be started by people who came out of technology companies.

* While some VC firms have operations on both coasts, those tend to operate somewhat independently and go after different opportunities, industry observers say.